Cross Border Business – Counting All Costs of Offshore Manufacturing

When a company imports merchandise the sticker price isn’t only the entry fee.

There are additional expenses, both direct and indirect, that impact the cost of goods  (COGs) evaluation.

A cross border business which includes overseas manufacturing should be itemized. The monetary items are recorded on the operating statement as either a costs of goods sold, or as an indirect cost which would be an item on an operating statement.  Attention should also be given to the indirect costs that do not have a monetary impact.

These “hidden” expenses are frequently ignored because they do not appear on a balance sheet or a profit and loss statement.

The sticker price may be 4 or 5 times higher if goods are manufactured in the USA, but a shopper should make a comparative analysis, taking into consideration all the additional out of pocket expenses and the hidden – non monetary costs that determine the actual cost of the merchandise.

A complete evaluation of the merits of importing must include the following:

Direct Costs

• Inventory (buying inventory by container vs. buying small quantities as needed)
• Freight (Delivery by ship vs. air and scheduling deliveries to meet customers’ delivery dates)
•  Import Duties (this is a variable expense, determined by governmental policies)
• Commissions paid to third parties for access to major retailers
• Storage and Handling Costs (warehouse vs. a fulfillment center – the proximity of storage to business operations. There may be additional shipping costs from warehouse locations to buyers.)

Indirect Costs

Many of the costs relating to imported goods will appear as an operating expense and therefore are not be allocated to the cost of goods sold. Nevertheless they are costs that impact the bottom line.

These costs include:

1. Quality Control Costs

An additional part time employee may be required.

It is imperative to have an agent at the manufacturing plant, during both the product development phase and during the time the merchandise is manufactured for shipment.

Large companies often have a full time employee hired for this responsibility, but the SME usually has to rely on an agent to oversee manufacturing. (If damaged merchandise is shipped and has to be returned because of quality issues, the company can lose a market opportunity or even an entire sales season. )

2. Travel Expenses incurred Shopping for the Best Manufacturing Resource.

This expense will most probably appear as  a travel expense on a P&L.

3. Cost of Borrowed Funds

Most SMEs need working capital loans to cover the short term costs of buying merchandise in large quantities.

A partial payment is usually required when placing the order, and the balance of the payment is due upon shipment.  These borrowed funds should cover the cost of    purchasing the goods plus the time needed for payment from the end user.

Large retailers request payment terms of 30 to 60 days following deliver.

A growing company has to make certain they have working capital that allows them to cover their operating costs while they await payment of invoice and also allows them to purchase inventory for other customers.

Next page-  Marketing Expenses and Non Monetary – Hidden Costs